Remembering ye of little Netflix faith

Not everybody thought Netflix’s streaming video idea was a good one. In fact, almost nobody did. Here’s my compilation of why-it-will-never-workisms from CED Magazine.

It was only six years ago that Netflix, then known mainly as a mail-order distributor of DVD movies, launched a novel streaming video service it called, blandly enough, the “instant watching” feature. With the service, about 1,000 of the 7,000 movies and TV shows otherwise available via DVD could be selected and streamed to subscribers’ computers, up to a limit of 18 hours per month.

The instant watching feature – later to be rebranded “Watch Instantly,” and by now largely analogous with Netflix itself – quickly gathered steam despite being shackled to a single-screen playback device. By July 2007, Netflix had served 5 million stream requests. A month later, the number rose to 10 million.

The rest is, of course, history. A succession of video device integration deals, a migration to the television set and a steady reinforcement of content transformed what started out as a sidecar offering into a mainstream, on-demand pay-TV service that is now a media force to be reckoned with.

Netflix divulged in June that its subscribers now watch more than 1 billion hours of streamed video monthly. More than 30 million households now subscribe to its video streaming subscription service. And Netflix’s agreement last month to acquire exclusive pay-TV rights for movies from Walt Disney Studios was the most dramatic evidence yet that Netflix has created a legitimate alternative to the traditional bundle model for premium video delivery over cable/satellite systems.

A look back at the early days of Netflix’s streaming endeavor is interesting for lots of reasons, but one that stands out especially is the reaction the idea received from the media industry mainstream.

The New York Times, previewing the soon-to-launch streaming video service in a January 2007 article, said Netflix was wading into treacherous waters. “While Netflix’s DVD rental business has thrived in part because of the company’s superior logistics, that competitive edge will not mean much in the world of digital distribution,” the article warned. Among particularly onerous competitors the newspaper singled out: Blockbuster.

From the content community, enthusiasm was tempered, too. USA Today quoted a senior executive from NBCUniversal who said that even though NBCUniversal was contributing content to the PC-video service, “we know television is the vastly preferred option.”

The Washington Post, citing similar online video explorations from companies like Amazon and Apple, said, “None of these products has been a hit, and some executives seem bent on keeping expectations low.”

In Inc. magazine, a Web retail executive suggested that Netflix “should move more quickly into video-on-demand by locking up relationships with two or three large cable operators, which can offer access to capital, personnel and large pools of customers.”

And in July 2007, an analyst for the website Motley Fool labeled Netflix’s early numbers for streaming views “paltry,” complained about a slim selection of titles and said he preferred watching DVD movies over television anyway.

None of these views seemed terribly off the mark at the time. In fact, they were entirely justifiable, given the prevailing environment and the shaky history of online video streaming. A truly radical point of view to express would have been the idea that Netflix would be delivering 1 billion hours of streaming video a month to 30 million subscribers in just six years. Or outbidding incumbent pay-TV program services for first window rights on Hollywood hits. But in 2007, nobody was suggesting such an outcome – not even Netflix.

In the perfect lens that hindsight provides, what’s instructive about some of the early reaction to Netflix’s video streaming venture is how they share the tendency to view new ideas from a perspective of existing reality. In other words: Television rules, cable companies have all the customers and DVDs offer a superior viewing experience. Those were the facts, true, but the error was in assuming they would always be the facts.

It’s a forgivable mistake. After all, most of the time, the present reality is the most readily available barometer. But one of the history lessons the Netflix story reinforces is that disruptive companies – at least successful disruptive companies – succeed by being willing to build businesses on educated hunches about where technology and behavior are going, not where they’ve been. It’s risky, and more often than not, most companies get it wrong. But the alternative approach is to model a business on existing demand curves and this year’s technology adoption patterns. And that’s even worse. Just ask Blockbuster.